By Juhee Cho, IIDA, LEED AP

Doing business in today's commercial real estate market can seem like taking a gamble in a back alley shell game. You watch the shell man's hands carefully. Left one? Wait a second. No, it's the middle one. But really, you are just guessing which shell hides the little rubber ball.

Building owners play with a lot more shells today as the economy continues to leave us guessing. Nationally, vacancy rates are significantly up across the country. According to Cushman & Wakefield, first quarter 2009 statistics for the U.S. office property market showed an increase in the central business district vacancy rate to 12.5 percent, up from 11.2 percent at the end of 2008. New construction completions and a significant increase in available sublease space have both played big roles in the vacancy rate surge.

Rents continue to decline as leasing activity slows and more space becomes available. Certain U.S. markets have taken a particularly hard blow. Office property rents in San Francisco suffered a jaw-dropping 24 percent decline in the first quarter from a year earlier, the biggest decline since the dot-com crash in 2001. Nearly 75 percent of San Francisco's Class A (premier) office buildings traded hands in the past four years, according to Tove Nilsen, director of market research at Colliers International.

However, some building owners are in a position to take advantage and reposition their building assets for when the market eventually turns around. While rents have dropped, so have the costs of construction, materials, and design. Architects and contractors, once too busy to look up, are more available now to grab a new project. Owners who reposition today will have a huge head start on their competition and be the first to realize a return on their investment with improved cash flows.

Repositioning to attract or retain tenants can range in scale and detail to suit budget size and strategy from façade replacements and sustainability upgrades, to remodeled lobbies and simple amenity elements. No matter the capacity, if the asset is there, these changes can bring older, tired buildings back to life, allowing them to become major players in this super-competitive market.

In Washington, D.C., where the office vacancy rate is expected to surpass 12 percent by 2010, flexibility, sustainability, security, and tenant amenities have become important priorities in competitive leasing to both public and private sector tenants. For the Constitution Center, one of the largest and most extensive repositioning projects ever to take place in the District, SmithGroup is engaged in the complete overhaul of the 1960s-era former headquarters building of the U.S. Department of Transportation, transforming it into an attractive, energy efficient and high security environment. When completed starting early 2010, the 1.4 million sq. ft., 10-story building, targeting LEED Gold, will feature a complete new façade, new cores, new elevators, new lobbies, a new main entrance, blast and progressive collapse mitigation, and an advanced, energy-saving chilled beam HVAC system, the largest of its kind in the United States. A new building with the same features of the Constitution Center would cost vastly more to bring to the market and with it, of course, much higher rent prices to tenants.

Sustainability is an accepted (and expected) concept. Tenants today almost demand they reside in a building that provides at least some sustainable aspects. Some U.S. cities have taken an aggressive approach, like pioneer Washington, D.C., which became the first major U.S. city to require all new large non-residential buildings be environmentally friendly by 2012. While a repositioning can provide new green opportunities, it should also lower operating costs for the owner. At the same time, control systems can be upgraded to meet green standards, and daylighting can be enhanced, similar to the features at the Constitution Center. Building owners should take advantage of U. S. government funds or stimulus package money for a renovation promising to incorporate sustainability measures.

Lobby renovations offer new first impressions to tenants without the expense of renovating the entire building. For example, the San Francisco building at 188 Embarcadero offers stunning waterfront views to tenants; however, the main lobby contrasted with the surrounding scenery. After the renovation, the new repositioned lobby opens into a bright, welcoming entry and now maintains a competitive advantage to neighboring buildings. After the renovation, the building's owner noticed an immediate difference in retaining tenants as well as attracting potential tenants.

Beyond design and construction, hotel-like amenities are a plus if an owner wants to stay competitive and command higher rents. Located in San Francisco's growing Mission Bay area, the new six-floor office building located at 500 Terry Francois needed tenant amenities to remain competitive with surrounding new developments. The owner added a fitness center, cutting-edge classroom, boardroom, and a full-time "five-star manager" whose sole responsibility is to take care of the needs of the tenants. In turn, the future tenants will save money and space by using the building's amenities rather than fitting them into their own floors.

So although today's market continues to be a guessing game, history has told us that one thing is certain—the economy will bounce back, and when it does owners who can take advantage to this timing will be positioned to quickly realize their return on investment.
 
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Juhee Cho, IIDA, LEED AP, is a vice president at SmithGroup, an 800-person architecture, engineering, interiors and planning firm with 10 offices across the U.S. She co-leads the Workplace practice at the firm's San Francisco office.